Key principles to ensure good corporate governance: Part 2

Boardroom Governance

In part one of our ‘principles of good governance’ series we discussed the importance of the capability and integrity of the board. At this stage we will be delving into how a board’s leadership can affect good governance whilst remaining accountable and sustainable.

The western world leads the way on good governance, but we still fall victim to scandals that have stemmed from an error in governance practises. We too often treat good governance to be a tick box exercise just to maintain appearances, without fully appreciating its core values and principles.

Just as a person’s inner ear is not visible to an outside observer when a person walks straight, an organisation’s governance structure is rarely visible in its day-to-day operations. However, when a person’s inner ear is not functioning, we can see the symptoms and effects in the way a person walks: their pace is uneven and they would be more likely to lose balance and direction. Likewise, when an organisation does not have good governance, we see the symptoms and effects of not having proper guidance and oversight.

Leadership

Today’s online blogging community is infatuated with the idea and practice of leadership. It is hard to avoid these new abundance of articles examining the traits of our political leaders or the accomplishments of managers in sport, such as Ranieri of Leicester FC, and comparing them to our boardrooms.

Leadership, when done right, is about the act of providing guidance and directing a team to act towards achieving a common goal. The board and CEO at the head of every organisation should practise the principles of good leadership and steer the company in the right direction to meeting its short and long term business goals. But it is not just those at this high level that can affect governance performance– we must also encourage anyone with line management duties throughout the organisation to be advocates of good leadership.

The recent scandals in Japan have made for a good case study of poor leadership due to the actions of some of its largest companies – Toshiba, Mitsubishi and Suzuki. From accountancy scandals to fuel testing violations– it has prompted the region into sweeping governance changes.

A common root cause was found amongst the scandals – poor leadership. Employees were reported to find it difficult to question their superiors and push back against unrealistic targets they were set. Given the existing Japanese culture that fears failure – employees would go to extreme lengths to please their management even if it meant breaking the law.

Accountability

In every aspect of our lives- we are told communication is important, and this applies just as equally to the boardroom when maintaining adequate accountability.

Accountability relies on transparency. The board should have clear visibility of what is happening throughout their organisation and the able to communicate a fair and balanced assessment to its shareholders and stakeholders.
It should be a relatively straight forward function, but is suspiciously a stage that is tripping a lot of companies up.

In an exposé that brought the motor industry to a screeching halt – the EPA discovered Volkswagen had been fitting cars with software that allowed them to cheat emission tests. The scandal gave us a considerable insight into a company, formerly associated with efficiency, and their lack of accountability and communication throughout the organisation. It illustrated a lack of accountability even at the organisations highest levels and the very costly consequences they faced because of it.

The activity of the emission tracking software should have been recorded and monitored by the team members in the engineering department along with the manager assigned to look after that team. The managers should then report the status and results of the device testing which would have made it visible to supervisors to determine at which point they went from standard to deceptive. If the supervisors were then aware of the deception, this should then have communicated the issue to the company board, who would in turn make their shareholders aware of a possible damaging situation.

Another issue affecting Volkswagen’s accountability was their lack of independent directors. Independent directors are board members, that are not otherwise associated with the organisation, who provide advice and prevent resident management from pursing their own self-interests. Volkswagen had a board of 20 people, and only one of those was an independent director emphasising a grim absence of effective accountability.

Very few organisations will function on the same magnitude as Volkswagen, but the same principles of their failures and the lessons we should take from them, can be applied to organisations of all sizes and sectors:

  • Give employees an avenue to voice concern and potential problems through the management channels all the way to the board.
  • Document and communicate projects and tasks that are being worked on throughout the organisation using a platform that allows for improved collaboration recording keeping of actions, such as a board portal.

Sustainability

Sustainability is an emerging, but important, principle of good governance. This aspect of governance requires an understanding of the company’s role in issues like environment preservation, but most commonly it involves how we handle social responsibility.

The board should be pushing the business to create value and allocate it fairly to its shareholders, directors, employees and customer. The person on top should be considering the person at the bottom when making a decision.

“Some people have been in this building for 45 years and they are not people who can just walk on to yachts. These are people who have mortgages and shop at Asda.”

These were sombre words spoken by a BHS employee has he left the company headquarters after hearing the retailer, of 88 years, was due to close. The fall of BHS was about more than just a £571m pension deficit, £400m of dividends and a £1 takeover. It was a failure of people to recognise their basic moral duties to others around them.

Philip Green and Dominic Chappell, did not recognise their moral duty towards 11,000 staff nor did they do enough for the company they owned. They took millions out of the company and offloaded it to a man who was not qualified to take it on.

The concern with BHS, and other large businesses, is an issue of allowing owners to do as they will without due concern of their staff. Recently we have seen Theresa May address this in her purposed corporate governance reforms to essentially put the staff on the board. This would be an adoption of the German governance model that ensures company owners take into account the interests of staff, suppliers and customers when making decisions about the company.

While the principles and issues we have covered in this two-part series, are overwhelming at first and quick fixes aren’t something that can be done overnight- there are options to pursue to help organisations overcome poor governance quickly. BoardPacks is a software tool for improving governance that seamlessly improves on a number of the principles using an effortless digital platform to conduct your business around meetings. For more information, visit our website or feel free to contact us.

posted on & filed under Governance Practices.

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